Meeting expectations of the corporate bond market
A new government decree tightens conditions on the issuance of corporate bonds. However, before the decree came into effect, enterprises flooded the market with new issuances. Assoc. Prof. Dr. Dinh Trong Thinh, senior lecturer at the Academy of Finance, investigates the ins and outs of the market.
Assoc. Prof. Dr. Dinh Trong Thinh, senior lecturer at the Academy of Finance
As access to bank capital is generally difficult and issuing bonds is one solution for businesses to reinvigorate their production and service lines in the new normal. In August, the overall value of privately issued corporate bonds within the financial and banking sector declined 35.3 per cent on-month to VND11.4 trillion ($495 million), accounting for 29.8 per cent of the total value of private placements.
Bank issuances reached the highest value with VND8.1 trillion ($352 million), while the remainder came from financial service companies. Since corporate bonds feature higher interest rates than deposits and other bond types, they are attracting considerable funds, with the most important direct input channel being deposits.
According to SSI Securities, corporate bonds issued in the first half of 2020 amounted to VND159 trillion ($6.9 billion), up 50 per cent on-year. From the beginning of the year, individual investors have directly purchased corporate bonds worth nearly VND22 trillion ($956 million), equivalent to 15 per cent of total issuances and 10 per cent higher than in 2019.
Along with China and Malaysia, Vietnam is one of the strongest Asian countries when it comes to corporate bonds. According to SSI, the size of this domestic market has increased by about 15.6 per cent compared to the end of 2019. Though these growth rates are strong, Vietnam’s market still needs time to mature to be able to follow the government’s expectations and provide capital to the economy together with credit institutions. Currently, the economy relies heavily on bank credit, with a credit volume of VND8.48 quadrillion ($368 billion) until June 30. Thus, the credit market is equivalent to 138.5 per cent of GDP, 10.75 times the corporate bond channel. In addition to the previously stated features of corporate bonds, the State Bank of Vietnam’s (SBV) moves to reduce deposit rates also made them less attractive. MB Securities noted that the bond volume issued by 137 enterprises reached VND174 trillion ($7.5 billion) in this year’s first six months, up 48 per cent over 2019.
Meanwhile, with Circular No.22/2019/TT-NHNN dated November 15, 2019, the SBV tightened regulations for the real estate credit channel. Circular 22 also promoted the mobilisation of capital through the bond channel to support companies’ activities and restructure existing debts. As a result, real estate businesses increased their capital and individual investors bought corporate bonds in the first half. In total, the real estate sector recorded VND11.4 trillion ($495 million) in issuances, down 6.8 per cent on-year and accounting for 29.8 per cent of the total private placement value. The Vietnamese corporate bond market was particularly active in August, for several reasons. First, companies needed to secure cash reserves as investment needs were increasing after the country repelled the latest wave of the pandemic. Second, many companies were actively issuing bonds before Decree No.81/2020/ND-CP issued in July on issuance of corporate bonds took effect on September 1.
However, the massive issuance of bonds by enterprises before Decree 81 could lead to a crash. Corporate bond distribution organisations and underwriters, including commercial banks and securities companies, also face the risk of being unable to fulfil obligations and commit to bondholders following the decree’s conditions and terms that might lead to a failure in meeting financial safety criteria. For instance, real estate businesses tended to increase the size of bond issuances while at the same time pushing up bond interest rates to attract funding.
Such vast growth in the quantity and value of issued bonds can create risks for sustainability, and investors could not recover their money if the issuers get into trouble or go bankrupt. Meanwhile, the market still has no mechanism to effectively control the issuance and transactions of individual corporate bonds. There are also not many capable consulting units to evaluate the credit ratings of bond issuers and assess the feasibility of their issuance plans. However, the entry into force of Decree 81 with its reasonable regulations will help the market develop and become more transparent.
Some amendments in Decree No.81/2020/ND-CP
Decree 81 amends and supplements several articles for domestically-issued corporate bonds of the previous Decree No.163/2018/ND-CP and came into effect on September 1.
According to these new regulations, each bond issuance must be completed within 90 days from the date of disclosure, the next issuance must be at least six months apart from the previous one, and issuances of the same batch must have the same conditions and terms.
In addition, within the first year, corporate bonds issued in the domestic market are restricted from trading within a range of fewer than 100 investors, excluding professional securities investors, unless otherwise dictated by court decision or inherited by provisions of the law.
After this first year, corporate bonds can be traded without limitation on the number of investors, unless the issuing company decides otherwise.
Furthermore, Decree 81 supplements regulations on stock exchange reports by depository institutions and consultation released on issued corporate bonds, among many others.